Great Time to Buy (Famous Last Words)

Home prices have not proved to be predictable, but they aren't the only factor buyers can consider.Credit
Justin Sullivan/Getty Images

“IT’S a great time to buy a home.”

Real estate agents were saying that in 2001, as home prices were rising. They also said it when home prices peaked in 2005 — in fact, David Lereah, former chief economist of the National Association of Realtors, published a book that year titled “Are You Missing the Real Estate Boom?”

And many real estate agents said it was time to buy as prices began to drop — and continued to say it over the past several years as prices fell by an average of 33 percent in America’s 20 largest cities.

Mr. Lereah would acknowledge that he had gotten it wrong. But from the perspective of many real estate agents, it is always a good time to buy.

“What they are really saying is that it is a good time to be involved in a transaction that generates a commission,” says Barry Ritholtz, C.E.O. and director of equity research at FusionIQ, a quantitative research firm. He’s also author of “The Big Picture,” an irreverent blog on markets.

If agents are always motivated to make a deal, buyers are often asking an impossible question: “Will the price of this house go up?”

Although the National Association of Realtors said for many years that home prices historically don’t fall, actually they do, and sometimes quite sharply. The housing market is complicated, and the future unknowable. Still, for clues to the overall direction of prices, Mr. Ritholtz advises buyers to look at three metrics: the ratio of median income to median home prices, which suggests whether people can afford a house; the cost of ownership versus renting; and the value of the national housing stock as a percentage of gross domestic product.

All those measures were aberrationally inflated during the housing bubble. And they still aren’t back to historical norms. We can get back to the norm in either of two ways, Mr. Ritholtz says: home prices can either drop an additional 15 percent or go sideways for seven years or so, while G.D.P. and income presumably grow.

To complicate matters, even if home prices rise or fall nationally, they may not follow that pattern in Las Vegas or South Florida or Maine, to say nothing of the neighborhood where you want to buy.

There may be a better way, however, for potential buyers to approach the problem. “Predicting interest rates is a whole lot easier than predicting home prices,” says Glenn Kelman, chief executive of Redfin, a multistate discount online real estate brokerage company based in Seattle. “Before you buy the house, you buy the money,” he says.

Photo

An ad for mortgage rates last year at a bank in Maine. The general direction of interest rates is one thing that a potential homebuyer can often predict.Credit
Robert F. Bukaty/Associated Press

It’s a little like walking into a dealership to buy a car, and finding the saleswoman immediately jotting down what your monthly payments will be and starting the negotiations there. That’s absolutely the wrong way to buy a car. But for a prospective homeowner, it’s a good place to start the analysis to determine how much house you can buy.

Instead of betting on home prices, you make a bet on whether money will become cheaper or more expensive, allowing you to buy more or less house.

That’s where the regular Joe has a pretty good shot of being right. You won’t know day to day, or week to week, what’s happening to rates, and a jolt like a default in Greece or a change in Chinese monetary policy can throw everything off. But, generally, the Federal Reserve is telegraphing where things are headed over the next six months.

“I can’t prove to you that housing prices have definitely bottomed out,” Mr. Kelman says. “I can say with a fair degree of certainty that the cost of money will go higher.”

OF course, if rates go up, home prices tend to dampen. Borrowing $300,000 at 5 percent costs you $1,610 a month. If rates rise to 6 percent, that’s $188 a month more, or $67,680 over 30 years. Would the price of a $375,000 house fall because of a half-point rate hike? Now you are back to guessing about home prices. Don’t go there. Maintain your focus.

“People are frequently buying for the wrong reasons,” says Frank LLosa, a real estate agent working in northern Virginia. In most cases, he says, they think that they are getting an income tax break or that their home is an investment.

He points out that a buyer of a $300,000 home would have to see the house appreciate $18,000 just to cover the commission and closing costs. Then figure in the predictable costs of maintenance, the opportunity costs of the mortgage down payment and the amount one could have saved by renting a similar place more cheaply.

Then there are property taxes.

In California, taxes alone can be $5,000 a year on that $300,000 house. In New Jersey, where property taxes are the highest in the nation, the extra cost can be even more. (The Star-Ledger of Newark calculated that, on average, residents in the town of Lodi pay 10 percent of their income in property taxes.) But who would have guessed that property taxes in that state would keep climbing, doubling over the course of seven years in some cases, even as home values stopped appreciating?

Mr. LLosa thinks that many people — including him — would be better off renting. People ought to buy a house for what he calls “warm and fuzzy feelings,” but they shouldn’t try to predict home prices. Nor should real estate agents, who aren’t much wiser.

“I don’t think real estate professionals should be in the business of telling people when it is a great time to buy,” he said.

Correction: March 21, 2010

The Everybody’s Business column last Sunday, about the future of the housing market, misstated the additional amount by which Barry Ritholtz of FusionIQ, a quantitative research firm, believed home prices needed to drop in the short term in order to return to historical norms. It is 15 percent, not 50.

A version of this article appears in print on March 14, 2010, on page BU1 of the New York edition with the headline: Great Time to Buy (Famous Last Words). Order Reprints|Today's Paper|Subscribe